Banks told to increase emergency funds to avert financial crisis

The probability of another financial crisis hitting the UK will be cut by a third if Britain’s biggest banks find a further £27bn of special capital in the next four years, according to the Bank of England.

Mark Carney, Bank governor, said: “The implementation of MREL is a crucial step forward in ensuring that any bank, large or small, carries sufficient resources to be resolved in an orderly way, without recourse to public subsidy and without disruption to the wider financial system.”

MREL is a minimum requirement for institutions to hold shares and debt that can bear losses when a bank runs into trouble. These reserves did not work during the 2008 crisis when the Bank was unable to force bondholders to take losses, requiring the taxpayer to step in instead.

“If the most systemically important institutions have sufficient MREL, then this can help to ensure that the government does not have to use public funds for any bailouts,” the Bank said. It would stop yields on government bonds rising and could mean that the cost of a financial crisis is reduced by between 5.4% and 11.4% of annual GDP.

Each of the systemically important banks – the likes of HSBC and RBS – would become a third less likely to fail. A bank that would have had a 1.5% probability of failingduring a certain period will now have a 1% probability. The probability of a crisis reduces by 26-41%.

Andrew Tyrie, chairman of the Treasury select committee, said banks were likely to complain about the additional capital: “This might appear an arcane and technical issue, but it matters to every taxpayer in this country. There will be another financial crisis one day. When it comes, it is essential that the taxpayer is not on the hook. The losses caused by bank failure should be borne by investors, not the wider public.”

The Bank of England expects to use its powers to demand banks that are on the brink of collapse use their MREL reserves only on institutions with more than 40,000 accounts used for day-to-day payments and cash withdrawals.